Ofgem published a Call for Input on 1 February 2023 asking whether the additional wholesale allowances within the default tariff cap should be reviewed, and if so, what form that review should take1. The allowances cover shaping, imbalance and transaction costs, and were set as fixed percentage uplifts in 2019 when the cap was introduced1. Responses are due by 1 March 2023 to retailpriceregulation@ofgem.gov.uk1.
The regulator said the market and the cap methodology have both changed significantly since 2019, raising the question of whether a review is appropriate, what scope it should have and what priority it should be given relative to other cap workstreams1. It set out two possible approaches if it decides to review the enduring method: a full review of the methodology, or a limited review and update of the input data1. Ofgem said it will proceed with a review if, on balance, it considers one likely to be in customer interests, particularly where there appear to be material and systematic deviations from the existing allowances1.
"Through this Call for Input, we are seeking views and evidence from stakeholders on whether a review of the additional wholesale allowances is appropriate and if so, what form it should take."
The three allowances have risen fivefold between October 2021 and January 2023, according to figures in the document for a typical dual fuel customer at typical domestic consumption values1.
| Cap period | Shaping | Imbalance | Transaction costs |
|---|---|---|---|
| October 2021 to March 2022 | £20.22 | £2.95 | £1.61 |
| April 2022 to September 2022 | £39.64 | £5.61 | £3.14 |
| October 2022 to December 2022 | £89.40 | £12.14 | £7.07 |
| January 2023 to March 2023 | £102.05 | £14.18 | £8.08 |
Ofgem said the question is whether actual additional wholesale costs have increased at the same rate as the allowances in a systematic way1. It noted that recent wholesale price volatility may in part reflect a tighter balance between available supply and demand, particularly at the winter peak or for certain products, and that some stakeholders have told it the wholesale market has seen low liquidity in some products, affecting suppliers' ability to trade energy1.
The Call for Input also raises enduring issues, including whether hybrid working has altered the demand profiles used in Ofgem's models and whether a greater share of weather dependent renewable generation has changed the cost of shaping at different times of day1. It asks whether more dynamic allowances, with more frequent reviews, would help, and whether separate allowances for Economy 7 and other time of use customers would improve accuracy, which Ofgem links to the expected go-live of market-wide half hourly settlement in late 20251. It also seeks views on the effect of the new End User Categories on prepayment meter customers1.
Ofgem said it does not intend to review the overall wholesale methodology at this stage, and that its November 2022 Programme of Work had noted an intention to review changes to the wider wholesale methodology separately1. It is issuing a draft request for information to suppliers alongside the Call for Input, and intends to issue a mandatory request for information in March 2023 to collect further quantitative and qualitative evidence1.
Why it matters for households
The additional wholesale allowances sit inside the wholesale cost component of the energy price cap, which sets the maximum a supplier can charge default tariff customers1. The cap varies by fuel type, benchmark consumption, meter type, region and payment method1. If the allowances are set higher or lower than a notional efficient supplier's real costs, that difference feeds through the cap calculation, and so into the energy bills that default tariff households pay.
Ofgem states that while the Energy Price Guarantee is in place and the cap level remains above it, related decisions will primarily affect public spending rather than customers' bills1. The EPG limits what a supplier can charge per unit and the cap acts as a reference price for calculating government support to suppliers1. That means the immediate effect of any change to the allowances falls on the Exchequer while the guarantee remains below the cap, though the cap methodology itself continues to determine what households would pay once the guarantee no longer applies.
For a household's energy independence, the allowances are one of the inputs that decide how much of a bill reflects the cost of buying and balancing power rather than other components. Ofgem's own framing is that the cap exists to ensure less engaged customers pay a fair price1. Whether the allowances track real costs matters to that aim, and the Call for Input is the point at which evidence on that question is being gathered.
What happens next
Responses to the Call for Input are due by 1 March 20231. Ofgem will use them to decide whether a review is appropriate and, if so, its scope1. A mandatory request for information to suppliers is intended for March 20231. No decision on whether to review the allowances, or on which of the two approaches it would take, has been reported.